Keep tax hike or face stark cuts, Quinn says

Illinois Gov. Pat Quinn gives his State of the State address at the Illinois State Capitol in Springfield.

Illinois Gov. Pat Quinn gives his State of the State address at the Illinois State Capitol in Springfield. (Scott Strazzante, Chicago Tribune)

Rick Pearson, Ray Long and Monique Garcia

Gov. Pat Quinn and ruling Democratic lawmakers united Wednesday around what they say is a stark election-year choice — vote now to make permanent the temporary income tax increase they installed three years ago or face major cuts in state spending on education and social services.

But Republican governor candidate Bruce Rauner and GOP lawmakers who are a minority in the General Assembly flatly rejected the way Quinn framed the debate in his budget speech at the Capitol. Calling his plan a blatant money grab, they argued that the only course of action was to begin rolling back the 67 percent tax increase as scheduled in January 2015.

The sharp contrast presented a clear option for voters as the fate of the tax increase takes center stage in the campaigning leading up to the Nov. 4 election — with the potential to influence not just the race for governor but contests up and down the ballot.

House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats, each voiced support for making the levy permanent, injecting the volatile tax issue into electoral contests in which Democrats hope to maintain overwhelming legislative majorities.

Quinn, seeking re-election to a second term after taking over from the impeached Rod Blagojevich in 2009, noted the upcoming election campaign in his 25-minute post-primary budget address without singling out Rauner by name.

“The truth is, those who are telling you that Illinois can tax less and spend less and still expect to fund education are simply not telling you the truth,” Quinn said in a pointed reference to Rauner, who has sought to appeal to voters as a longtime education advocate.

“Today, I propose that we take the path that is honest and responsible, the path that protects everyday families and invests in their future,” he said.

But in calling for making the tax increase permanent, Quinn played into a consistent attack line of Rauner, who even before winning the GOP nomination for governor last week had labeled the Democratic governor's tenure as a litany of broken promises.

“After five years of Pat Quinn's failed leadership, we have record tax hikes, outrageously high unemployment, massive cuts in education, and there's still a giant budget mess in Springfield,” Rauner said in a statement. “It's now or never to save Illinois. We can balance the budget without more tax increases, if we create a growth economy and restructure and reform our broken government.”

Rauner backs the scheduled rollback of the personal income tax and has called for a comprehensive overhaul of state tax policies with an eye toward making them more beneficial to business. However, he has not been specific about any other tax changes or how he would make up for the estimated $4 billion in annual revenue lost to the state with the rollback of the tax. He did not make himself available to answer questions Wednesday.

In unveiling what he said was a comprehensive five-year spending plan, Quinn said he was rejecting “any new, unfair taxes,” such as broadening the state's sales tax to include services, or taxing retirement income.

Quinn said extending the income tax would support a $38.6 billion general fund account for the coming year that he would use to provide more money to schools, tuition grants to low-income college students and a new initiative to provide wellness efforts and early childhood learning for children from birth to age 5.

At the same time, Quinn presented a “not recommended” budget that would allow the bulk of the income tax to sunset on schedule. The $34.9 billion general fund alternative, he warned, would lead to massive teacher layoffs and loss of social services such as child care and community care services while forcing local property taxes to increase.

Madigan said Quinn “told the truth” in his budget speech.

“He laid the cards on the table. If we wish to continue to provide the level of services which we've become accustomed to for education and other purposes then the income tax increase should be extended,” Madigan said during a public television interview, adding, “My demand as part of this program is relief for homeowners on their real estate taxes.”

The House speaker also said he favored a “broad-based” tax bill that also provides “help for Illinois businesses.” Asked about the likelihood of a vote before the general election, Madigan said, “My expectation is that we'll resolve this before the end of the spring session, which is the end of May.”

Republicans argued that Democrats failed to deliver on their promise to use the tax increase to help restore the state to fiscal solvency and thus don't deserve another chance to lead.

Sen. Matt Murphy, of Palatine, a GOP point man on budget issues, said Democrats created “as dire-looking a picture as possible to justify continuing to take more taxpayer money.”

“They seem desperate to make this look so bad that there's no reasonable way for this tax rate to go back down,” Murphy said.

He said Quinn's proposal to roughly double the current amount of overall property tax relief is equivalent to a $600 million “kickback” that would raise the overall amount of state relief for homeowners to more than $1.2 billion a year.

At the center of the issue is the tax increase passed and signed into law two months after Quinn's narrow 2010 victory over Republican Sen. Bill Brady of Bloomington. Quinn had campaigned on the need for a tax increase to help an Illinois government drowning in debt and facing destabilizing costs for pensions and social services.

Democrats in the post-election lame-duck session provided the votes in the legislature, and Quinn approved an increase in the personal tax rate from 3 percent to 5 percent and a boost in the corporate rate from 4.8 percent to 7 percent. The personal tax rate is scheduled to roll back to 3.75 percent and the corporate rate to 5.25 percent in January.

Delivering his budget proposal for the fiscal year that begins July 1, Quinn sought to offer some sweeteners for keeping the tax increase — including a doubling of the tax credit for lower-income workers and replacing the current 5 percent property tax credit for homeowners on state income taxes by offering a flat $500 property tax rebate.

“As a result of our hard work to restore fiscal stability — from spending reductions to pension reform to contract savings — Illinois is in a much stronger financial position than it was five years ago,” Quinn said.

While the temporary tax boost he signed was pitched as a way to pay the state's overdue bills, billions of dollars in overdue bills remain. On Wednesday, Quinn framed the permanent extension as an education issue.

“The issue of expiring revenue this year is a real challenge that will require another hard choice,” Quinn said. Without the higher income tax, he said, the state will face “extreme cuts that will starve our schools.”

Quinn said that by keeping the income tax increase, “we can stabilize the budget for the long-term, in a way that provides targeted tax relief where it's needed most: to homeowners and working families raising kids.”

Cullerton credited Quinn for “a really bold stand” and said he didn't expect any support from Republicans. He said the best strategy to make the income tax hike permanent would be to start in the House, where Madigan's Democratic majority is smaller.

“I guess (Republicans) figure since we're in the majority that it's our responsibility. So if that's the case, then we'll take it up when the House passes it,” Cullerton said.

But some rank-and-file Democrats were not as ready to take on the tax increase issue as their leaders — even avoiding it entirely in their news releases to hometown constituents.

Freshman Sen. Napoleon Harris III, D-Harvey, who is up for re-election, said vaguely that “there are various options on the table” and that lawmakers “must strategize and develop a comprehensive plan.”

The economic and political dynamics of Quinn's budget are not yet clear. For working- and middle-class voters, Quinn dangled the prospect of expanded tax credits that would put more money in their pockets. On the other hand, he asked taxpayers to forgo a significant cut in the overall income tax rate next year.

Therese McGuire, an expert on state finance at Northwestern University's Kellogg School of Management, said the $500 property tax rebate Quinn proposed would appear to mostly benefit working- and middle-class voters. At the same time, she noted, the homeowner credit does nothing for the large number of people who rent.

At present, Illinois law enables homeowners to slice their income tax bills by an amount equal to 5 percent of the property taxes they pay. Illinois homeowners who pay less than $10,000 annually in property taxes would benefit under Quinn's proposal. For example, a homeowner who now pays $5,000 in property taxes now qualifies for a $250 credit off their income tax bill but would see that amount double.

However, any new property tax savings for individual homeowners could be more than offset by having to continue to pay the higher income tax rate.

Quinn sought to portray his fiscal blueprint as part of an effort to end a cycle of budget game-playing by his predecessors that left state finances in shambles. He said part of his strategy was the controversial pension overhaul law last year that he argued would dramatically cut retirement costs and let more tax revenue flow to schools, health care and other services.

Rauner contends that Quinn's pension alterations are too timid and will save the state far less than the governor contends. That argument may have gotten a boost Wednesday when the state's bipartisan fiscal forecasting agency revised downward by several billion dollars its long-term savings projection for the pension overhaul.